Question

Answer all parts

The owners’ equity accounts for Overby International are shown here:

Common stock ($1 par value)		$	45,000
Capital surplus			236,000
Retained earnings			780,000
Total owners’ equity		$	1,061,000

a. Suppose the company declares a two-for-one stock split.

How many shares are outstanding now? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

New shares outstanding _______?

What is the new par value per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

New par value    _____    $ per share

b. Suppose the company declares a one-for-five reverse stock split.

How many shares are outstanding now? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

New shares outstanding    ______?

What is the new par value per share? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

New par value    _____    $ per share

Answer 1

(a) Stock split:

If Two-for-one stock split is announced, each shareholder will be issued an additional share for each share currently owned. Thus the shareholder will have twice as many as shares after the split.

Before Stock-split:

• Par value = $1
• Shares outstanding = 45,000

After stock-split:

• Par value = $1/2 = $0.50
• Shares outstanding = 45,000 * 2 = 90,000

(b) Reverse stock-split

Reverse stock split: If a company announces, one-for-five reverse stock split, then it merges 5 stocks to 1 stock. So if an existing holder owns 5 stocks, he will receive 1 stock.

Before reverse stock-split:

• Par value = $1
• Shares outstanding = $45,000/$1 = 45,000

After reverse stock-split:

• Shares outstanding = 45,000 / 5 = 9,000
• Par value = $5 per share ($45,000 / 9,000 = $5 per share)